Stock Market Crashes

Schulmerich, Marcus; Leporcher, Yves-Michel; Eu, Ching-Hwa

doi:10.1007/978-3-642-55444-5_4

Marcus Schulmerich⁴,
Yves-Michel Leporcher⁵ &
Ching-Hwa Eu⁶

Part of the book series: Management for Professionals ((MANAGPROF))

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Abstract

This chapter offers a historical overview of significant stock market crashes. It delineates the build-up of a bubble and outlines the general characteristics of a crash. It presents historical crashes with a regional and a global impact. Among the former are the tulip mania, the South Sea bubble, the railway mania, the Souk Al-Manak crash, the Dubai real estate bubble, the Greek crisis and the flash crash of May 6, 2010, on the New York Stock Exchange. The latter include the Great Crash of 1929, the Asian financial crisis, the Russian financial crisis, the dotcom bubble and the subprime crisis. The chapter closes with a study case on the Chinese stock exchange and real estate market.

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Notes

1.
A summary of the key bubbles and crashes presented in this section can be found in the white paper Stock Market Crashes and Financial Bubbles: What History Tells us, see Schulmerich (2010b).
2.
Sandeep Patel was the director and head of portfolio analytics in HFDMG at Merrill Lynch from November 2005 to March 2008 and founder and managing member of Governance Performance Management from August 2004 to October 2005. Dr. Patel has 20 years of experience in capital markets.
3.
Asani Sarkar is a visiting lecturer at Princeton University and research officer with the money and payments function of the Federal Reserve Bank of New York.
4.
Patel and Sarkar (1998, p. 6).
5.
Ahrens (2008).
6.
Paul R. Krugman was born on February 28, 1953. He is an American economist, columnist and author. He is professor of economics and international affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and columnist for the New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economics for his contributions to new trade theory and new economic geography.
7.
Krugman (2009, p. 63).
8.
The FSTAS (Financial Times Stock Exchange Strait Times All Share) is an index of the London Stock Exchange , London, U.K. The FTSE Strait Times All Share Index (FSTAS) is a modified market capitalization weighted index comprising all companies within the top 98 % by full market capitalization of the SGX Mainboard (Singapore Exchange) universe (i.e., large-cap, mid-cap and small-cap indices combined). There are 640 mainboard listings on the SGX.
9.
The Concise McGraw-Hill Dictionary of Modern Economics defines speculation as “the act of knowingly assuming above-average risks with the hope of gaining above-average returns on a business or financial transaction”, see Greenwald (1983).
10.
Kindleberger and Aliber (2005, p. 16).
11.
R. H. Inglis Palgrave’s original Dictionary of Political Economy (1894–1899), was a landmark in both publishing and economics, a liberal and scholarly overview of the whole sphere of economic thought in its days. Henry Higgs’s revised edition, Palgrave’s Dictionary of Political Economy (1923–1926), retained the spirit of the original while embracing new concepts in the development of economics as a discipline. An online version is available at http://www.dictionaryofeconomics.com/dictionary.
12.
Eatwell, Milgate, and Newmann (1987, p. 181).
13.
Shiller (2005, p. 2).
14.
Pinto, Henry, Robinson, and Stowe (2007, p. 15).
15.
Historical P/E ratio is also referred to as trailing P/E ratio.
16.
http://www.csinvestor.com/investing-guide/stocks/high-pe-ratio.
17.
Focus Media Holding Limited (ticker: FMCN) is a Chinese company traded on the NASDAQ . The company is China’s leading digital media group.
18.
Technical analysis aims at generating profit on stock markets based on historical price chart analysis and trends.
19.
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. A high value corresponds to a more volatile market and therefore more costly options. Often referred to as the fear index, it represents a measure of the market’s expectation of volatility over the next 30 day period. The VIX Index was introduced in 1993 in a publication by Professor Robert E. Whaley of Vanderbilt University, see Whaley (1993).
20.
The total put-call ratio is the original indicator introduced by Martin Zweig, a money manager and author who was one of the few traders who escaped the crash of 1987 by buying put options. The put-call ratio is calculated using the following equation: total put options purchased divided by total call options purchased. It measures the mood of investors, see Duarte (2006, p. 163).
21.
Formed in 1993, the RYDEX (Nova + OTC)/Ursa ratio measures the prevailing sentiment among investors, determining whether the majority of mutual fund switchers are generally bullish, bearish or somewhere in between. RYDEX Nova provides 1.50 times the performance of the S&P 500 Index. That is, if the S&P 500 Index rises 1 %, the RYDEX Nova will provide 1.5 % to the investor. RYDEX Ursa provides − 1. 00 times the performance of the S&P 500 Index. The RYDEX was the first fund family to offer a short fund and a leveraged mutual fund. See Headley (2002, p. 27).
22.
Patel and Sarkar (1998, p. 6).
23.
Garber (2001, p. 3).
24.
An explanation of normal distribution can be found in Sect. 1.2.2.
25.
On October 19, 1987, the Dow Jones Industrial Average Index lost 22,61 %. See Mandelbrot and Hudson (2004, p. 4).
26.
Mandelbrot and Hudson (2004, p. 4).
27.
Professor Emanuel Derman is the director of the MS program in financial engineering at Columbia University and head of risk management at Prisma Capital Partners. Previously he was the managing director in firm-wide risk at Goldman, Sachs & Co. and a columnist for Risk magazine. He obtained a Ph.D. in Particle Physics at Columbia University.
28.
Derman (2004, p. 10).
29.
Shiller (2008, pp. 6–9).
30.
Khor and Khor (2001, p. 65).
31.
The Internal Revenue Service IRS is the U.S. government agency responsible for tax collection and tax law enforcement.
32.
For more information on the 401(k) plan, an official pedagogic resource is available at http://www.401k.org.
33.
Since 2008, people who have a 401(k) are able to sue in an attempt to recover losses if they think their accounts have been mishandled. See Stout (2008a).
34.
GDP stands for gross domestic product. The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. See the website of the Organisation of Economic Co-operation and Development at http://stats.oecd.org/glossary/detail.asp?ID=1163.
35.
Shiller (2008, p. 5).
36.
On July 18, 1966; on December 10, 1966; on April 20, 1967 and on June 4, 1967. See NTSB (1967).
37.
They are also known as the Juglar cycle of 7–11 years of duration and were discovered in 1862. See Greenwald (1983, p. 593).
38.
The Dow Jones Industrial Average is the best-known U.S. index of stocks, a price-weighted average of 30 actively traded, well-established companies’ shares. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies perform. It is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow.
39.
We took this date because the oldest publicly available data provided by the Bureau of Economic Analysis are from this year.
40.
The Bureau of Economic Analysis provides quarterly data only since 1947, when this method started to be used.
41.
Fama (1970).
42.
Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University, professor of finance and fellow at the International Center for Finance of Yale School of Management and, together with Eugene F. Fama and Lars P. Hansen, winner of the Nobel Prize in Economics 2013. He is the author of numerous books in finance among which stand bestsellers like Irrational Exuberance etc.
43.
Shiller (2005, p. 91).
44.
The Charter of Munich is a code of ethics signed by representatives of most of the European and international journalists organizations in 1971. The sixth article mentions that media “provides a right, balanced and impartial information ; gives the possibility to different points of view to be expressed when about controversial issues; when somebody is implicated (called into question) in an article, allows him to react and to defend himself if he wishes, either in the related article or in an article to be published later.” An online version is available at http://www.mediawise.org.uk/european-union.
45.
Shiller (2005, p. 91).
46.
Edmans, Garcia, and Norli (2007, p. 1971).
47.
Dunmore (1991, p. 1).
48.
Galbraith (1979).
49.
Perron (1989).
50.
Underwood (2009).
51.
Fitch (2010).
52.
Bogle (2008).
53.
Driver and Martell (2002).
54.
Kaminsky and Schmuklerb (1999).
55.
Dungey, Fry, Gonzalez-Hermosillo, and Martin (2002).
56.
Ofek and Richardson (2003).
57.
Arbeter (2007).
58.
Frank, González-Hermosillo, and Hesse (2008).
59.
Hasan (2010).
60.
Krudy (2010).
61.
State Street Global Advisors (SSgA) is, as of December 31, 2013, the second largest institutional asset manager worldwide with roughly $ 2 tn. as asset under management spanning almost all asset classes.
62.
Economist Intelligence Unit (2012, p. 2).
63.
Galbraith (1997).
64.
The dollar value of securities purchased on margin within an account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes. See http://www.investopedia.com/terms/m/margin_debt.asp.
65.
Filippo Pananti (1766–1837) is a Tuscan poet. Exiled for his liberal republicanism in 1799, he settled in London, where he published burlesque poetry and prose, including his masterpiece, the mordant verse novel Il poeta di teatro (1808). Returning to Italy in 1814, he was captured by pirates, as he describes in Aventure e osservazioni sopra le coste di Barberia (1817).
66.
Emperor Julian, also known as Julian the Apostate as well as Julian the Philosopher, was Roman Emperor from 361 to 363 and a noted philosopher and Greek writer.
67.
The Dutch Golden Age which lasted through most of the seventeenth century was brought about in part by religious toleration and successful trade with the rest of Western Europe.
68.
At the peak of the tulip mania in February 1637, tulip bulb contracts sold for more than ten times the annual income of a skilled artisan.
69.
Malkiel (2003, p. 35).
70.
Charles Mackay (1814–1889) was a Scottish song writer, poet and journalist.
71.
Mackay (1995, p. 94).
72.
Earl A. Thompson (1931–1978) was a leading American writer of naturalist prose whose premature death prevented him from achieving the long-standing popularity of other writers.
73.
Thompson (2006, p. 3).
74.
The movie Wall Street: Money Never Sleeps from 2010 is the successor of the blockbuster movie Wall Street from 1987 (director Oliver Stone) in which Michael Douglas plays the ruthless investment banker Gordon Gekko . Michael Douglas received his second Oscar award for this role which at the end of the 1980s and in the 1990s inspired many young professionals to enter the finance industry.
75.
Malkiel (2003, p. 39).
76.
Malkiel (2003, p. 39).
77.
Malkiel (2003, p. 40).
78.
Malkiel (2003, pp. 38–39).
79.
Malkiel (2003, p. 41).
80.
Malkiel (2003, p. 41).
81.
Malkiel (2003, p. 41).
82.
Malkiel (2003, p. 42).
83.
Malkiel (2003, p. 42).
84.
Malkiel (2003, p. 40).
85.
Malkiel (2003, pp. 42–44).
86.
Carswell (2002, p. 142).
87.
Malkiel (2003, p. 44).
88.
Jackman (1916, p. 586).
89.
Odlyzko (2010, p. 74).
90.
Odlyzko (2010, p. 12).
91.
Archives from Hansard, Hansard Database (1825), the official report of debates in Parliament.
92.
This law had been passed in consequence of the crash of the South Sea Company.
93.
Odlyzko (2010, p. 42).
94.
Odlyzko (2010, p. 6).
95.
Parnell (1833, pp. 101–119).
96.
Bright (1837).
97.
Odlyzko (2010, p. 161).
98.
Bright (1837, pp. 140–141).
99.
Odlyzko (2010, p. 4).
100.
Arnold and McCartney (2004, pp. 952–953).
101.
Odlyzko (2010, p. 86).
102.
Odlyzko (2010, pp. 58 and 139).
103.
Odlyzko (2010, p. 131).
104.
Odlyzko (2010, p. 90).
105.
Odlyzko (2010, p. 114).
106.
Bona fide investors are investors with good faith, whose aim is not to buy and sell to make money quickly.
107.
The literal transcription of this name would be camel market . Yet, it is highly questionable that it formerly was a real camel market. The name rather refers to the ambiance of these markets in the past.
108.
Rasmaroni (2006).
109.
Hassan, Al-Sultan, and Al-Saleem (2003, p. 7).
110.
Financial Times (1995) which published the survey on p. iii of its May 23 edition.
111.
Darwiche (1986, pp. 87–89).
112.
Hassan et al. (2003, p. 7).
113.
Hassan et al. (2003, p. 7).
114.
Darwiche (1986, pp. 20, 86, 87 and 88).
115.
Darwiche (1986, p. 93).
116.
Verenoso’s testimony as a consultant in Veneroso (1998).
117.
Financial Times (1995).
118.
This refers to the price-to-earnings ratio mentioned previously in Sect. 4.4.
119.
Darwiche (1986, p. 79).
120.
GulfMedical was initially a hosteling venture, which failed to find the required capital. It then was transformed in a hospital project before being able to go public.
121.
Quinn (2010).
122.
Darwiche (1986, p. 61).
123.
Darwiche (1986, p. 72).
124.
Darwiche (1986, p. 15).
125.
A postdated check is a check issued at present but with a later maturity date so it cannot get encashed at the present date. The check is like a promissory note and no legal action can be taken if the account closes down or there is shortage of funds.
126.
In finance, to corner the market refers to getting sufficient control of, for example, a particular stock to allow the stock price to be manipulated.
127.
Quinn (2010).
128.
Darwiche (1986, p. 25).
129.
Fitch (2010).
130.
Fitch (2010).
131.
Quinn (2010) and Darwiche (1986, p. 99).
132.
Veneroso (1998).
133.
See the 1995 survey in Financial Times (1995) published on May 23, and Darwiche (1986, p. 107).
134.
See the 1995 survey in Financial Times (1995) published on May 23.
135.
Darwiche (1986, p. 87).
136.
The U.A.E. is a federation of seven sheikdoms, including Abu Dhabi and Dubai , which have separate ruling families and separate budgets, but joint security, immigration and foreign policies. Abu Dhabi is the senior partner in the group and controls 90 % of its vast oil reserves, considered to be the world’s fifth largest.
137.
Spencer (2009).
138.
Burj Khalifa Bin Zayed has been the tallest building in the world since August 2010.
139.
Gapper (2009).
140.
Bianchi and Critchlow (2010).
141.
Spencer (2009).
142.
Salama (2010).
143.
Anderson and Heather (2007).
144.
Spain (2009).
145.
Greenwood (2009, pp. 1–2).
146.
Hosking and Robertson (2009).
147.
Hosking and Robertson (2009).
148.
Bianchi and Critchlow (2010).
149.
Bianchi and Critchlow (2010).
150.
Bianchi and Critchlow (2010).
151.
Spencer (2009).
152.
AED stands for United Arab Emirates dirhams.
153.
Irish (2010).
154.
Bianchi and Critchlow (2010).
155.
Nakheel is one of the world’s largest real estate developers. It is one of the financial vehicles used by Dubai to implement its investing strategies in real estate.
156.
Kennedy (2009).
157.
Spencer (2009).
158.
Greenwood (2009, p. 2).
159.
Sakoui and Kerr (2010).
160.
Bps stands for basis point. One basis point is a percent of a percent.
161.
Hernandez (2009).
162.
Hernandez (2009).
163.
Systemic risk: the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. See Working Paper Kaufman (1999, pp. 28–29), also published in Kaufman (2000).
164.
Hernandez (2009).
165.
Schuman (2009).
166.
Hernandez (2009).
167.
Hosking and Robertson (2009).
168.
Dan Alpert is managing partner of Westwood Capital . The company provides financial services in mergers & acquisitions, restructuring, financial advisory and litigation support.
169.
Hernandez (2009).
170.
Sakoui and Kerr (2010).
171.
Sakoui and Kerr (2010).
172.
Sakoui and Kerr (2010).
173.
European Economy Series (2009).
174.
European Economy Series (2009, p. 1).
175.
Mucha (2010). Updated data is available through the World Bank online database at http://data.worldbank.org/indicator/NY.GDP.PCAP.CD.
176.
Source: FTSE/Athens Stock Exchange Large Cap Index (Ticker: FTASE:IND).
177.
Source: Bloomberg, as of September 30, 2013 (Ticker: FTASE:IND).
178.
There are three big audit companies, whose role is to asses the quality of investment tools and companies present on the market. Each company has its own grading system. Yet, the grades given by the audit companies are comparable. The companies are Fitch Ratings, Standard & Poor’s and Moody’s.
179.
These grades are important for credit access conditions. The higher the grade, the lower the yield a country or a company has to pay. An asset, say a sovereign debt of a given country, is less risky when graded “A” than when graded “A-”. The downgrading means that a country has to pay more if it wants to seek financial resources on the markets.
180.
Rascouet (2009).
181.
Berteloot and Hebert (2010).
182.
See the official and updated elements regarding the Stability and Growth Pact on the website http://ec.europa.eu/economy_finance/economic_governance/sgp.
183.
See the article from the Agence Francaise de Presse (2010) in the newspaper Liberation.
184.
Kennedy and Ross-Thomas (2010).
185.
Eurostat is the European Union’s statistics agency in charge of evaluating different economic factors and issues.
186.
Becatoros (2010).
187.
Tupy (2010).
188.
Becatoros (2010).
189.
Becatoros (2010).
190.
France 24 (2010).
191.
Germany is considered a benchmark for stability in the European Union . Sooner in history, the country had seen its national currency heavily devalued after World War II, and since then has tried to keep a very strong hold on the stability of its economy and currency.
192.
Becatoros (2010).
193.
Becatoros (2010).
194.
Daily Telegraph (2010).
195.
Berteloot and Hebert (2010).
196.
Berteloot and Hebert (2010).
197.
Capital Economics is a leading macroeconomic research consultancy.
198.
Becatoros (2010).
199.
Becatoros (2010).
200.
Tupy (2010).
201.
Marc Faber studied economics at the University of Zurich and, at the age of 24, obtained a Ph.D. in economics magna cum laude. He is also the author of several books including Tomorrow’s Gold—Asia’s Age of Discovery which was first published in 2002 and highlights future investment opportunities around the world, see Faber (2002). This book was for several weeks on Amazon’s best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.
202.
The Gloom Boom & Doom Report highlights unusual investment opportunities.
203.
Kennedy and Ross-Thomas (2010).
204.
Angela Merkel, born in 1954, has been the Chancellor of Germany since 2005.
205.
Agence Francaise de Presse (2010).
206.
Berteloot and Hebert (2010).
207.
Berteloot and Hebert (2010).
208.
Pearlstein (2010).
209.
EBRD stands for European Bank for Reconstruction and Development. Founded in 1991, it is the largest financial investor in its region of operations which stretches from central Europe and the Western Balkans to central Asia.
210.
Gaunt (2010).
211.
PIIGS is an acronym which stands for Portugal, Ireland, Italy, Greece, Spain. They held a large amount of debt which went well above the limits fixed by the European Union and the Stability Pact.
212.
Sakoui (2010).
213.
Blackstone (2010).
214.
Berteloot and Hebert (2010).
215.
Pearlstein (2010).
216.
Bear Stearns, Lehman Brothers and AIG are banks that went bankrupt after the subprime crisis. See Gaunt (2010).
217.
Gaunt (2010).
218.
Berteloot and Hebert (2010).
219.
Oosterveld and Carlson (2010).
220.
Gaunt (2010).
221.
Gaunt (2010).
222.
This day was also referred to as the flash crash as will be explained later. See Gaunt (2010).
223.
This day was also referred to as the flash crash as will be explained later. See Gaunt (2010).
224.
Berteloot and Hebert (2010).
225.
Cox (2010).
226.
Gaunt (2010).
227.
Herman Van Rompuy was the President of the European Council during the Greek crisis. The European Council is the institution of the European Union responsible for defining the general political direction and priorities of the union.
228.
Blackstone (2010).
229.
The Hypo Real Estate Holding AG is a holding company based in Munich, Germany which comprises a number of real estate financing banks. The company’s activities span three sectors of the real estate market: commercial property, infrastructure and public finance, and capital markets and asset management. Hypo Real Estate is the second largest commercial property lender in Germany. See Associated Press (2008b) on October 4.
230.
Berteloot and Hebert (2010).
231.
Hureaux (2010).
232.
Hureaux (2010).
233.
Pearlstein (2010).
234.
Spiegel Online (2010).
235.
Mahier and Duval (2010).
236.
Spiegel Online (2010).
237.
IMF stands for International Monetary Fund. Founded in 1944 after the Bretton Woods agreements, its aim is to help countries in economic distress because of economic and monetary constraints.
238.
Becatoros (2010).
239.
Tupy (2010).
240.
Mahier and Duval (2010).
241.
Mahier and Duval (2010).
242.
Berteloot and Hebert (2010).
243.
The full version of the conditions is available online, see Ministry of France (2010).
244.
Mahier and Duval (2010).
245.
Tweed and Eglitis (2010).
246.
Blackstone (2010).
247.
Berteloot and Hebert (2010).
248.
Laurent Fabius served as French prime minister from July 17, 1984 to March 20, 1986. He was 37 years old when he was appointed and has been, so far, the youngest prime minister of the Fifth Republic.
249.
Schulmerich (2010a, p. 1) and Rice (2010, p. 1).
250.
Patel and Sarkar (1998, p. 6).
251.
Schulmerich (2010a, p. 2).
252.
Rice (2010, p. 1).
253.
Rice (2010, p. 2).
254.
Schulmerich (2010a, p. 1).
255.
Schulmerich (2010a, p. 2).
256.
Barclays Capital Equity Research (2010, p. 2).
257.
Schulmerich (2010a, p. 2).
258.
Schulmerich (2010a, p. 2).
259.
The CFTC aims to protect market users and the public from fraud, manipulation and abusive practices related to the sale of commodities, financial futures and options, but also to foster open, competitive and financially sound futures and option markets.
260.
Wyatt and Bowley (2010).
261.
Wyatt and Bowley (2010).
262.
Roger Freeman (Brokers/Exchanges Analyst) and Matt Rothman (Quant Analyst) from Barclays Capital . See Barclays Capital Equity Research (2010).
263.
Barclays Capital Equity Research (2010, p. 2).
264.
At the NYSE Euronext stock exchange, NYSE Arca is an all-electronic U.S. trading platform that provides fast execution with open, direct and anonymous market access. According to the analysts at Barclays Capital, around 30 % of the average daily trading volume in the U.S. equity market is executed electronically, i.e., off-exchange, but misunderstandings about the use and users of electronic trading systems are widespread. While quantitative investors and traders account for a large proportion of the order flow, a significant amount can also be attributed to trading by fundamental investors.
265.
Westbrook (2010).
266.
Westbrook and Mehta (2010).
267.
The Investment Company Institute (ICI) is the national association of U.S. investment companies. ICI encourages adherence to high ethical standards, promotes public understanding of funds and investing, and advances the interests of investment funds and their shareholders, directors, and advisers.
268.
Rice (2010, p. 1).
269.
The U.S. Securities and Exchange Commission (SEC) is an agency of the United States federal government. It holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.
270.
Securities and Exchange Commission (2011).
271.
FINRA is the Financial Industry Regulatory Authority. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.
272.
Ketchum (2014).
273.
Schulmerich (2010a, p. 4).
274.
Schulmerich (2010a, p. 6).
275.
Schulmerich (2010a, p. 6).
276.
Schulmerich (2010a, p. 6).
277.
Schulmerich (2010a, p. 6).
278.
Kindleberger and Aliber (2005, pp. 8 and 108).
279.
International Monetary Fund (1998, p. 77).
280.
Brooks (1999, p. 65).
281.
Galbraith (1997, p. 72).
282.
Galbraith (1997, p. 72).
283.
Sheeran and Spain (2004, p. 119).
284.
Vickers (1994, p.63).
285.
Galbraith (1997, p. 72).
286.
Galbraith (1997, p. 73). A Ponzi scheme is an investment scam that pays returns to its investors from existing or new funds paid by new investors, rather than from profit earned from an investment made. Operators of Ponzi schemes usually attract new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The scheme is named after Charles Ponzi (March 3, 1882–January 18, 1949) who became notorious for using such a scheme in the U.S. in 1920. His scheme ran for over a year before it collapsed, costing his “investors” $ 20 mn.
287.
Galbraith (1997, p. 75).
288.
Greenberg (2006).
289.
Galbraith (1997, p. 1).
290.
Galbraith (1997, p. 43).
291.
Galbraith (1997, p. 46).
292.
Trading on margin consists in resorting to loans to invest in stocks that are expected to rise so as to make profit.
293.
Brooks (1999, p. 101).
294.
Galbraith (1997, p. 49).
295.
Galbraith (1997, p. 49).
296.
Galbraith (1997, p. 77).
297.
Galbraith (1997, p. 75).
298.
Sobel (1999, p. 369).
299.
Shiller (2005, p. 178).
300.
Celanese sold and exported a wide variety of chemical products.
301.
Peabody was the largest private sector coal company.
302.
Brooks (1999, p. 110).
303.
Brooks (1999, p. 109).
304.
Galbraith (1997, p. 81).
305.
Galbraith (1997, p. 77).
306.
Atherton (2009).
307.
Salsman (2004, p. 16).
308.
Bierman (1998, pp. 16–17).
309.
Krugman (1994, p. 62).
310.
From 1965 to 1990, East Asia had a remarkable record of high and sustained economic growth. 23 economies grew faster than those of all other regions, while the U.S. and Europe were stuck under a growth perspective. See Page (1994, p. 221).
311.
Krugman (2000, p. 111).
312.
Krugman (2000, p. 111).
313.
Krugman (2000, p. 111).
314.
A eurobond is an international bond that is denominated in a currency not native to the country where it is issued.
315.
Krugman (2000, p. 117).
316.
Karunaratne (1999, p. 20).
317.
Asia-Pacific Economic Cooperation, or APEC, is the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region. APEC is an intergovernmental grouping that operates on the basis of non-binding commitments, open dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral trade bodies, APEC has no treaty obligations required of its participants. Decisions made within APEC are reached by consensus and commitments are undertaken on a voluntary basis. A more in-depth presentation of the organization is available at http://www.apec.org/About-Us/About-APEC.aspx.
318.
Park (1996, p. 357).
319.
Maturity risk is the risk that the value of a bond may change from the time it is issued to when it matures. It is specific to bonds and credits.
320.
Krugman (2000, p. 118).
321.
Krugman (2000, p. 118).
322.
Krugman (2000, p. 118).
323.
Krugman (2000, p. 119).
324.
Park (1996, p. 358).
325.
Krugman (2000, p. 112).
326.
Cline and Barnes (1997, p. 1).
327.
Krugman (2000, p. 119).
328.
Krugman (2000, p. 119).
329.
Krugman (2000, p. 119).
330.
Krugman (2000, p. 119).
331.
Source: Bloomberg, ticker KOSPI:IND and SET:IND for the stock exchanges of South Korea and Thailand.
332.
Hanbo Steel was a steel producing company later purchased in 2004 by Hyundai, a car manufacturer.
333.
A chaebol is a South Korean form of business conglomerate. It is typically a global multinational owning numerous international enterprises, controlled by a chairman who has power over all the operations.
334.
Krugman (2000, p. 119).
335.
Krugman (2000, p. 135).
336.
Krugman (2000, p. 135).
337.
Krugman (2000, p. 135).
338.
Krugman (2000, p. 135).
339.
Krugman (2000, p. 111).
340.
Moreno (1998).
341.
Krugman (2000, p. 116).
342.
Krugman (2000, p. 116).
343.
Krugman (2000, p. 116).
344.
Krugman (2000, p. 115).
345.
Krugman (2000, p. 116).
346.
The Association of Southeast Asian Nations is a geopolitical and economic organization of ten countries located in Southeast Asia, which was formed in 1967. Its aims include accelerating economic growth, social progress and cultural development among its members, protection of regional peace and stability, and providing opportunities for member countries to discuss differences peacefully.
347.
Palma (2000, p. 12).
348.
Eccleston, Dawson, and McNamara (1998, p. 109).
349.
Edwards (2000, pp. 43–60).
350.
George Soros, born in 1930, is a Hungarian-American investor and the chairman of Soros Fund Management. He is known as The Man Who Broke the Bank of England because of his $ 1 bn. in investment profits during the 1992 Black Wednesday U.K. currency crisis. He also invested massively in Asia at that time and researchers investigated his role in the crisis in this region. See Brown, Goetzmann, and Park (1998, p. 2).
351.
Chiodo and Owyang (2002, p. 11).
352.
Chiodo and Owyang (2002, p. 9).
353.
Chiodo and Owyang (2002, p. 9).
354.
Shleifer and Treisman (2001, p. 91).
355.
Chiodo and Owyang (2002, p. 12).
356.
Chiodo and Owyang (2002, p. 10).
357.
Desai (2000, p. 51).
358.
Chiodo and Owyang (2002, p. 13).
359.
Chiodo and Owyang (2002, p. 12).
360.
Chiodo and Owyang (2002, p. 12).
361.
Chiodo and Owyang (2002, p. 14).
362.
Chiodo and Owyang (2002, p. 14).
363.
Chiodo and Owyang (2002, p. 13).
364.
Chiodo and Owyang (2002, p. 14).
365.
Chiodo and Owyang (2002, p. 10).
366.
Chiodo and Owyang (2002, p. 10)
367.
Chiodo and Owyang (2002, p. 14).
368.
Kaplan Schweser (2012, p. 109).
369.
Kaplan Schweser (2012, p. 109).
370.
Long Term Capital Management (LTCM) was a fund founded by John Meriwether , an exceptionally successful bond trader. Two of his consultants (Myron S. Scholes and Robert C. Merton) were Nobel-prized professors who had discovered a closed-form formula to price a European option (Black-Scholes formula ).
371.
Kaplan Schweser (2012, p. 109).
372.
Kaplan Schweser (2012, p. 110).
373.
Dungey et al. (2002).
374.
The events around the fall of LTCM are described in detail in Lowenstein (2002).
375.
Stiglitz (2003).
376.
Cassidy (2003, p. 70).
377.
Cassidy (2003, p. 70).
378.
CERN is the European Organization for Nuclear Research. The name CERN is derived from the acronym for the French Conseil Européen pour la Recherche Nucléaire.
379.
Cassidy (2003, p. 38).
380.
Cassidy (2003, p. 79).
381.
This company provides Internet access on Sun Microsystems computers running Unix.
382.
Cassidy (2003, p. 79).
383.
Cassidy (2003, p. 79).
384.
PSINet was one of the first internet service providers.
385.
UUNET, founded in 1987, was one of the largest Internet service providers and one of the nine tier 1 networks.
386.
Cassidy (2003, p. 80).
387.
Cassidy (2003, p. 85).
388.
Cassidy (2003, p. 81).
389.
Cassidy (2003, p. 85).
390.
Cassidy (2003, p. 295).
391.
Cassidy (2003, p. 85).
392.
Cassidy (2003, p. 85).
393.
Cassidy (2003, p. 102).
394.
Cassidy (2003, p. 102).
395.
David Schulman was then an investment strategist at the investment bank Solomon Brothers .
396.
Norris (1995).
397.
(Cassidy, 2003, p. 121).
398.
Cassidy (2003, p. 154).
399.
Cassidy (2003, p. 154).
400.
The Glorious Thirties are a period between World War II and the 1970s, characterized by a relatively steady growth of the economy and a significant improvement of the living standard in developed countries.
401.
Cassidy (2003, p. 153).
402.
Cassidy (2003, p. 158).
403.
Cassidy (2003, p. 161).
404.
Desai (2000, p. 51).
405.
Source: Bloomberg (tickers: DJIA:IND and NASDAQ for the DJIA and the NASDAQ, respectively).
406.
Excite is a web portal company featuring search, content and functionality for personalization.
407.
Amazon is an Internet-based company providing media products, mostly books.
408.
Yahoo! is a web company offering various services on the Internet.
409.
America Online, also known as AOL is an Internet access provider.
410.
Cassidy (2003, p. 186).
411.
Cassidy (2003, p. 186).
412.
See the Financial Times article This is Unquestionably a Bubble, Financial Times (1998).
413.
Founded by Georges Soros, this fund had achieved very profitable deals based on event trading. His event-driven strategies lead the fund to take very large positions, which, if failed, could massively endanger economies, even the U.S. economy. See Brown et al. (1998, p. 1).
414.
Cassidy (2003, p. 187).
415.
Cassidy (2003, p. 188).
416.
Cassidy (2003, p. 188).
417.
Cassidy (2003, p. 207).
418.
Cassidy (2003, p. 206).
419.
Cassidy (2003, p. 213).
420.
Cassidy (2003, p. 216).
421.
Cassidy (2003, p. 192).
422.
Ritter (2010, Table 11, p. 17).
423.
Cassidy (2003, p. 243).
424.
Source: Own, based on Ritter (2010, Table 11, p. 17).
425.
Source: Own, based on Ritter (2010, Table 11, p. 17).
426.
TheGlobe.com was an internet start-up founded in 1994 and offered social networking services. The company’s stock price collapsed in 1999, and the company retrenched for several years before ceasing operations in 2008.
427.
eBay is an online auction and shopping website where people and businesses buy and sell a broad variety of goods and services worldwide.
428.
Cassidy (2003, p. 196).
429.
Cassidy (2003, p. 212).
430.
Cassidy (2003, p. 213).
431.
Cassidy (2003, p. 69).
432.
Cassidy (2003, p. 192).
433.
Cassidy (2003, p. 203).
434.
Cassidy (2003, p. 286).
435.
Cassidy (2003, p. 232).
436.
Cassidy (2003, p. 255).
437.
Cassidy (2003, p. 256).
438.
Cassidy (2003, p. 256).
439.
Cassidy (2003, p. 268).
440.
Cassidy (2003, p. 268).
441.
Cassidy (2003, p. 239).
442.
Cassidy (2003, p. 218).
443.
Ralph Acampora is a pioneer in technical analysis and worked as the New York Institute of Finance’s Director of Technical Analysis Studies.
444.
Cassidy (2003, p. 218).
445.
Cassidy (2003, p. 261).
446.
Cassidy (2003, p. 261).
447.
Cassidy (2003, p. 198).
448.
Cassidy (2003, p. 244).
449.
Cassidy (2003, p. 261).
450.
Cassidy (2003, p. 273).
451.
The term irrational exuberance comes form a speech on December 5, 1996, from the chairman of the Fed, Alan Greenspan . He criticized the behavior of the stock markets’ investors as being far from the required rationality on an investment process. See Shiller (2005, p. 231).
452.
Cassidy (2003, p. 268).
453.
Cassidy (2003, p. 271).
454.
Cassidy (2003, pp. 273–274).
455.
Cassidy (2003, p. 271).
456.
Value America was a dotcom company. Its business model involved connecting customers on the web directly to manufacturers, with the intent of providing better pricing and faster shipping. See Cassidy (2003, p. 271).
457.
Cassidy (2003, p. 271).
458.
Cassidy (2003, p. 271).
459.
Cassidy (2003, p. 274).
460.
Cassidy (2003, p. 281).
461.
Cassidy (2003, p. 282).
462.
Cassidy (2003, pp. 271–272).
463.
Cassidy (2003, pp. 286–287).
464.
Cassidy (2003, p. 271).
465.
Cassidy (2003, pp. 284–285).
466.
Cassidy (2003, p. 287).
467.
Cassidy (2003, p. 287).
468.
Cassidy (2003, p. 288).
469.
Cassidy (2003, p. 288).
470.
Cassidy (2003, p. 289).
471.
Cassidy (2003, pp. 287–289).
472.
Economist Online (2000).
473.
Cassidy (2003, p. 291).
474.
Cassidy (2003, p. 295).
475.
Cassidy (2003, p. 293).
476.
Cassidy (2003, p. 302).
477.
Bloomberg under ticker INDU for the DJIA Index, CCMP for the NASDAQ Index and YHOO for Yahoo.
478.
Bloomberg under ticker INDU:IND for the DJIA Index.
479.
Cassidy (2003, p. 295).
480.
Callis and Cavanaugh (2007, p. 1).
481.
The FICO score is a score established by the Fair Isaac Corporation , a company founded by an engineer and a mathematician, which sells a credit-scoring system to banks and equivalent credit granting institutions. For more information on the company: http://www.fico.com/en/Company/Pages/about.aspx.
482.
Fabozzi (2002, p. 286).
483.
Office of the Press Secretary (2002).
484.
Birger (2008a).
485.
In ARMs, the interest rate becomes floating after a number of years. See Birger (2008b).
486.
Balloon payment mortgages have an outsized payment when the loan comes due. See Birger (2008b).
487.
Interest-only loans require only the repayment of interest (no principal) during the first few years of the loan, but then hit borrowers with large monthly payment which are reset monthly. See Birger (2008b).
488.
This option allows borrowers to underpay by as much as they want during the first few years. Then, the unpaid accrued interest part has to be paid in addition to the formerly set interest rates. See Birger (2008b).
489.
Birger (2008b).
490.
A shadow banking system is characterized by non-bank originators which grant a credit to borrowers. They are not subject to the same regulations as conventional banks. See Shiller (2008, p. 42).
491.
Shiller (2008, p. 12).
492.
Shiller (2008, p. 12).
493.
Callis and Cavanaugh (2007, Table 4, p. 4).
494.
Uhlfelder (2009, p. 2).
495.
New York Times (2007).
496.
Bush (2008).
497.
Updated information on rates is available on the website of the Board of Governors of the Federal Reserve System, see Federal Reserve Bank (2014a). See also Schulmerich (2003, p. 10).
498.
These effects and interactions are nicely described in Schulmerich (2012).
499.
This index is often only called Case-Shiller Home Price Index.
500.
The big four are Bank of America Corp., J. P. Morgan Chase & Company, Citigroup, Wells Fargo & Company.
501.
Reserve Bank of India (2010).
502.
Reserve Bank of India (2010).
503.
Mengle (2007, p. 6).
504.
Mengle (2007, p. 6).
505.
Mengle (2007, p. 30).
506.
A credit event occurs when a borrower cannot meet its financial obligations toward a credit and thus is in default. See Mengle (2007, p. 6).
507.
The government-sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make these segments of the capital market more efficient and transparent.
508.
Leonnig (2008).
509.
The United States Department of Housing and Urban Development, also known as HUD, is a cabinet department in the executive branch of the United States federal government.
510.
Wallison (2011, Table 5, p. 61).
511.
Government-Sponsored Enterprises (GSEs) Report from the Fed as of September 17, 2010, in Federal Reserve Report (2010a, Table L.124, line 16), and Federal Reserve Report (2010b, Table L.125, line 2).
512.
Benett (2007).
513.
NPR delivers breaking national and world news and top stories from business, politics, health, science, technology, music, arts and culture. For more information: http://www.npr.org.
514.
See Glass (2008).
515.
Kirchhoff and Keen (2007).
516.
Pasha (2005).
517.
Knox (2006).
518.
Pearlstein (2010).
519.
Pearlstein (2010).
520.
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the services of the underlying debt are also given ratings.
521.
Economist Online (2007).
522.
Birger (2008a).
523.
Origination is the process by which a borrower applies for a new loan, and a lender processes that application.
524.
Bernard (2008).
525.
Bernanke (2008).
526.
Arnold (2007).
527.
Steverman and Bogoslaw (2008).
528.
Steverman and Bogoslaw (2008).
529.
Economist Online (2008).
530.
Please note the difference between the personal disposable income and the debt as a percentage of disposable income. See Balance Sheet of Households and Nonprofit Organizations Report from the Fed as of September 17, 2010, in Federal Reserve Report (2010c, Table B.100, lines 31 and 48, p. 104).
531.
Barr (2009).
532.
Historical Fed rates available at Federal Reserve Bank (2014b).
533.
Feldstein (2008).
534.
Blitzer and Guarino (2008).
535.
Blitzer and Guarino (2008).
536.
Blitzer and Guarino (2008).
537.
Liebowitz (2009).
538.
Associated Press (2008a).
539.
See Coy (2008a) and Coy (2008b).
540.
Stout (2008b).
541.
Yoon (2007).
542.
Anderson and Heather (2007).
543.
Hutchinson (2010).
544.
Stout (2008b).
545.
Elliott (2009).
546.
McLaughlin (2010).
547.
The city invested in CDOs and lost 35 mn. kroner ($ 64 mn.) from investments that had fallen to less than 45 % of their original value. See Ivry (2007).
548.
Labaton (2008).
549.
Statement of FHFA Director James B. Lockhart in Russell and Mullin (2008).
550.
Bureau of Economic Analysis database at http://www.bea.gov/index.htm.
551.
Historical and current U.S. debt amounts are available on the Internet, see TreasuryDirect Reports (2014).
552.
The events of the subprime crisis and the fall of Lehman Brothers as the culminating point are described in detail in Paulson (2010).
553.
Ludwig von Mises (1881–1973) was an Austrian School economist.
554.
See von Mises (1966).
555.
See von Mises (1966, p. 572).
556.
Kleinert (2009, p. 199).
557.
Arbeter (2007).
558.
Felsenthal (2007).
559.
These two companies, born during the dotcom bubble, survived the crisis and are considered being among the most successful companies of the 2000s decade.
560.
According to Boco, Germain, and Rousseau, an overconfident investor achieves a better performance than a rational investor during bubbles. See Boco, Germain, and Rousseau (2010, p. 2).
561.
Data available on CountryMeters (2010).
562.
Chancellor (2010, p. 3).
563.
Gerrity (2010).
564.
Such projects are not for the economic benefit of a nation, but rather for the prestige they are assumed to generate for the leaders of the projects.
565.
Huang (2008, pp. 74–86).
566.
Chancellor (2010, p. 5).
567.
Across a wide range of sectors, China implemented protectionist measures in order to boost its own domestic firms and lock out foreign competitors. See Moore (2010). Yet the World Trade Organization also warned the United States to stop equivalent measures toward Chinese companies. See Xinhua (2010b).
568.
The Great Recession is the period following the subprime crisis, which covers the general economic downturn across the world and the recession of most industrialized countries. See Chancellor (2010, p. 5).
569.
The Chinese currency is not freely exchangeable and is valued against a basket of currencies since mid-2010, among which the U.S. dollar takes a good share. Before, the Chinese currency was pegged to the U.S. dollar.
570.
Chancellor (2010, p. 5).
571.
Ferri and Liu (2009).
572.
Yasheng Huang is professor in international management at the Massachusetts Institute of Technology. He wrote Capitalism with Chinese Characteristics: Entrepreneurship and the State. See Huang (2008).
573.
Chancellor (2010, p. 5).
574.
In 2010, Victor Shih was an assistant professor of political science at Northwestern University specializing in Chinese politics.
575.
Akkermans (2010).
576.
Chrystal and Mizen (2001, pp. 2–3).
577.
Shen (2010).
578.
Chancellor (2010, p. 6).
579.
Studwell (2003, p. 208).
580.
Chancellor (2010, p. 9).
581.
Bloomberg, as of August 2, 2010.
582.
Eichengreen and Mitchener (2003, p. 83).
583.
Chancellor (2010, p. 9).
584.
Chancellor (2010, p. 5).
585.
Xinhua (2010a).
586.
Xinhua (2010c).
587.
National Bureau of Statistics of China (2013).
588.
Chancellor (2010, p. 6).
589.
European Chamber Report (2010, p. 7).
590.
Chancellor (2010, p. 6).
591.
Michael Pettis is an analyst for the Financial Times and specialist for Asian markets.
592.
Pettis (2009).
593.
Harrison (2009).
594.
Pettis (2009).
595.
Chancellor (2010, p. 4).
596.
Krugman (1994, p. 2).
597.
Bull (2013).
598.
Harrison (2009).
599.
Transparency International (2009).
600.
Chancellor (2010, p. 7).
601.
China Real Estate News (2010).
602.
Nguyen (2010).
603.
Wong (2010).
604.
HSBC Global Research (2010, p. 4).
605.
Manek (2013).
606.
Wei and Bull (2010) and HSBC Global Research (2010, p. 4).
607.
Patel and Sarkar (1998, p. 6).
608.
Source: Fig. 4.27, Factset.
609.
Anderlini (2010).
610.
Censky (2010).
611.
Quantitative Easing II was a rescue package designed to revitalize the U.S. economy in 2010, the first and third one being launched so as to boost the American economy in 2009 and 2012, respectively. See Censky (2010).
612.
Wang (2013).
613.
Gerrity (2010).
614.
Gerrity (2010).
615.
Gerrity (2010).
616.
Gerrity (2010).
617.
Akkermans (2010).
618.
CLSA is Asia’s leading independent brokerage and investment group. It provides brokering, investment banking and asset management to corporate and institutional clients around the world.
619.
Schuman (2009).
620.
Gerrity (2010).
621.
Until mid-2010, China pegged its currency to the U.S. dollar, establishing a fixed exchange rate between the two currencies. This was the basis of a large money supply coming from abroad, made even bigger with the declining value of the U.S. dollar on forex markets. This flood of money has granted easy access to money for Chinese citizens for the past years.
622.
Akkermans (2010).
623.
Gerrity (2010).
624.
On October 3, 2010, Prime Minister Wen Jiabao signed 13 investment contracts in the Greek tourism and transportation industry. See Guichard (2010).
625.
A
2.25 bn. agreement ($ 3. 07 bn.) was signed on October 7, 2010, concerning solar energy, telecommunications, etc. See Solaro (2010).
626.
On November 4–5, commercial agreements amounting for
20 bn. ($ 27. 3 bn.) were signed in aeronautics, nuclear energy, telecommunications, etc. See Lefief and Boucey (2010).
627.
Jourdan (2013).
628.
Rapoza (2013).
629.
Rapoza (2013).
630.
The latest available data are as of July 2013. This trend may continue in the subsequent period.
631.
Rapoza (2013).
632.
The China Banking Regulatory Commission is a regulatory entity meant to enhance security and transparency in the Chinese financial industry by ensuring supervisory and regulatory measures.
633.
Akkermans (2010).
634.
Akkermans (2010).
635.
Chancellor (2010).
636.
Chu and Wen (2009).
637.
Chancellor (2010).
638.
E&Y Research Report (2006).
639.
Gerrity (2010).
640.
Chung, Rosenberg, and Tomeo (2004, p. 3).

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State Street Global Advisors (SSgA), Munich, Germany
Marcus Schulmerich
Crédit Agricole, Paris, France
Yves-Michel Leporcher
Deutsche Bank, London, UK
Ching-Hwa Eu

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Schulmerich, M., Leporcher, YM., Eu, CH. (2015). Stock Market Crashes. In: Applied Asset and Risk Management. Management for Professionals. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55444-5_4

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